The sum of all KPIs is 1. The motivation system for the CEO and the bonus amount are calculated based on the following formula:
Bonus = (BFKPI1 x A + BFKPI2 x B +….) x D,
Where:
BFKPI1 is the size of the bonus fund KPI1. The share of each KPI in the total amount of the fund is determined based on its weight.
The letter designations A, B, etc. represent performance factors.
D is a factor that can block the advertising data package bonus payment if the minimum indicator values have not been achieved. The threshold value can be set for the overall activity of the organization (for example, to receive a bonus, it is necessary to fulfill at least 70% of the plan) and for each individual item. It varies from 1 to 0.
The use of this method is an effective solution, since it allows you to take into account the importance of tasks and KPIs. However, this method is considered quite complex. It is usually used in situations where the enterprise does not have an accurate understanding of the importance of its goals, their interrelations and priorities. Forming a strategic map can help solve this problem.
If a company knows exactly its goals and the sequence of their achievement for a certain period, then it is better to use a simpler method.
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Method 2 – creating a KPI map “head-on”
This method is widely used in practice. First, all the goals set by shareholders are written out (usually profit and profitability). Then, for each of them, KPIs and their weights are determined (with a total amount equal to 1). The conditions under which the bonus is paid in full or in part are also indicated.
For clarity, let's look at an example where the CEO has KPIs assessed according to the following criteria:
receipt of financial resources;
profit level;
the number of repeat contracts with clients over a certain period (in kind or in monetary terms);
percentage of top-level tasks completed within the established deadlines;
total revenue per employee (can be calculated by division or separately for production or office personnel).
KPI Map
Source: shutterstock.com
If the bonus system is inextricably linked to the KPI, then two minimum values should be set for each indicator:
threshold – if a certain level is not reached, the bonus is not paid;
blocking - if the indicator does not reach this level, then the reward is not accrued regardless of the percentage of completion of other KPIs.
To soften the blocking value, you can introduce an additional bonus for exceeding the plan. The formula for calculating the bonus amount takes into account five indicators, each of which is assigned its own threshold and blocking values. At the same time, their weight is determined by the shareholders and may require additional discussions with the performer.
The table below shows an example of calculating a bonus based on a KPI using the “head-on” method.
Indicator Source of data on the planned value Source of actual value data Weight of the indicator in the bonus Threshold value, % of planned Blocking value, % of planned Reward for overfulfillment
Receipt of financial resources Finance Department Finance Department 0.3 80 60 Proportionally
Profit (according to management accounting) Management accounting system (MAS) SUU 0.25 90 60 Proportionally
Repeat customer contracts per quarter Commercial department CRM 0.15 80 60 Proportionally
Percentage of top-level tasks completed within the specified deadlines Shareholders' Council Shareholders' Council 0,1 70 60 No
Revenue per employee (production units) SUU SUU 0.2 80 60 Proportionally
To determine the bonus amount, both planned and actual values are used. They are obtained in the company's accounting system. In this case, the same formula is used as in the first approach. As a rule, the methodology for calculating KPI is developed by the company's financial department, based on the data provided by the management accounting system.